Leases

6 Months Ended

Jun. 30, 2019

LEASES

The Company adopted authoritative guidance related to leases effective January 1, 2019 using the modified retrospective method. The comparative information presented in the condensed consolidated financial statements was not restated and is reported under the accounting standards in effect for the periods presented. See ‘Leases’ in Note 2 — Recent Accounting Pronouncements for a discussion of the significant changes resulting from adoption of the guidance.

The Company’s lease portfolio consists primarily of real estate assets, which includes retail, warehouse, distribution center, and office spaces, under operating leases expiring at various dates through 2033. Leases with an original term of twelve months or less are not reported in the condensed consolidated balance sheet; expense for these short-term leases is recognized on a straight-line basis over the lease term.

Many leases include one or more options to renew, with renewal terms that if exercised by us, extend the lease term from one to 10 years. The exercise of these renewal options is at the Company’s discretion. When assessing the likelihood of a renewal or termination, the Company considers the significance of leasehold improvements, availability of alternative locations, and the cost of relocation or replacement, among other considerations. The depreciable lives of leasehold improvements are the shorter of the useful lives of the improvements or the expected lease term. The Company determines the lease term for each lease based on the terms of each contract and factors in renewal and early termination options if such options are reasonably certain to be exercised.

Due to the Company’s centralized treasury function, the Company utilizes a portfolio approach to discount its lease obligations. The Company assesses the expected lease term at lease inception and discounts the lease using a fully-secured annual incremental borrowing rate, adjusted for time value corresponding with the expected lease term.

Certain of our retail store leases include rental payments based upon a percentage of retail sales in excess of a minimum fixed rental. In some cases, there is no fixed minimum rental and the entire rental payment is based upon a percentage of sales. Certain of our warehouse leases have rental payments that vary based upon the volume of product placed in storage. In addition, certain leases include rental payments adjusted periodically for changes in price level indexes. We recognize expense for these types of payments as incurred and report them as variable lease expense.

Right-of-Use Assets and Operating Lease Liabilities

Amounts reported in the condensed consolidated balance sheet were:



	June 30, 2019
	(in thousands)
Assets:
Right-of-use assets	$	163,808
Liabilities:
Current operating lease liabilities	$	45,394
Long-term operating lease liabilities	124,329
Total operating lease liabilities	$	169,723

Lease Costs and Other Information

Lease-related costs reported in the Company’s condensed consolidated statement of operations were:



	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
	(in thousands)
Operating lease cost	$	14,749	$	29,679
Short-term lease cost	387		1,747
Variable lease cost	4,300		7,289
Total lease costs	$	19,436	$	38,715

Other information related to leases, including supplemental cash flow information, consists of:



	Six Months Ended June 30, 2019
	(in thousands)
Cash paid for operating leases	$	33,729
Right-of-use assets obtained in exchange for operating lease liabilities ⁽¹⁾	190,102

⁽¹⁾ Includes $176.1 million for operating leases existing on January 1, 2019 and $14.0 million for operating leases that commenced in the six months ended June 30, 2019.



	As of June 30, 2019
Weighted average remaining lease term (in years)	5.5
Weighted average discount rate	4.8	%

Maturities

The maturities of the Company’s operating lease liabilities were:



	As of June 30, 2019
	(in thousands)
2019 (remainder of year)	$	23,614
2020	47,412
2021	39,420
2022	26,607
2023	18,391
Thereafter	41,095
Total future minimum lease payments	196,539
Less: imputed interest	(26,816		)
Total operating lease liabilities	$	169,723

Leases That Have Not Yet Commenced

As of June 30, 2019, we had significant obligations for leases that have not yet commenced related to our new distribution center and office relocation projects. In the fourth quarter of 2018, the Company entered into a lease agreement for a new distribution center in Dayton, Ohio, which is expected to fully replace the Company’s existing facility in Ontario, California by the end of 2019. The contractual commitment related to this lease, with payments beginning at substantial completion of the building and continuing through 2030, is approximately $25.4 million, with expected total capital investments of approximately $35 million. In the first quarter of 2019, the Company entered into a lease for its new corporate headquarters and regional office in Broomfield, Colorado. The contractual commitment related to this lease, with payments beginning in March 2020 and continuing through August 2030, is approximately $20.4 million, with expected net capital investments totaling $7.0 million.

Comparative Information as Reported Under Previous Accounting Standards

The following comparative information is reported based upon previous accounting standards in effect for the periods presented.

Future minimum lease payments under operating leases were:



	As of December 31, 2018
	(in thousands)
2019	$	42,455
2020	36,299
2021	29,714
2022	20,721
2023	15,334
Thereafter	54,149
Total minimum lease payments ⁽¹⁾	$	198,672

⁽¹⁾ Includes future minimum lease payments of $25.4 million related to the new distribution center in Dayton, Ohio.

Rent expense for operating leases was:



	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018
	(in thousands)
Minimum rentals⁽¹⁾	$	17,532	$	35,771
Contingent rentals	5,535		7,695
Total rent expense	$	23,067	$	43,466

⁽¹⁾ Minimum rentals include all lease payments as well as fixed and variable common area maintenance, parking, and storage fees, which were approximately $2.4 million and $4.8 million in the three and six months ended June 30, 2018, respectively.